August 2018 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment rose by 201,000 jobs in August -- slightly above expectations of +198,000. However, combined June and July employment gains were revised down by 50,000 (June: -40,000; July: -10,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) remained at 3.9% because the drop in the number of employed persons (-423,000) nearly matched the contraction in the labor force (-469,000). 

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Observations from the employment reports include:

* The household (423,000 fewer people employed) and establishment (+201,000 jobs) survey results were wildly out of sync.

* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors; that does not appear to have occurred in August. Although imputed jobs from by the CES (business birth/death model) adjustment were about average for the month of August (since 2000), the BLS also applied a larger (i.e., more negative) than-average seasonal adjustment to the base data. Had average August adjustments been used, employment changes might have been roughly +236,000 instead of the reported +201,000.

* As for industry details, Manufacturing contracted by 3,000 jobs. That result is inconsistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded in August at a faster pace than in July. Wood Products employment lost 800 jobs (ISM was unchanged); Paper and Paper Products: +1,800 (ISM increased). Construction employment added 23,000 (ISM increased). 

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* The number of employment-age persons not in the labor force (NILF) jumped by 692,000 (+0.7%), to a new record of 96.3 million. Accordingly, the employment-population ratio retreated to 60.3%; thus, for every five people being added to the population, roughly three are employed. 

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* Similarly, the labor force participation rate (LFPR) fell to 62.7% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees rose by $0.10, to $27.16, resulting in a 2.9% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages advanced by $0.07, to $22.73 (+2.8% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours, average weekly earnings increased by $3.45 (+0.4%), to $937.02 (+3.5% YoY). With the consumer price index running at an annual rate of 2.9% in July, workers may finally be gaining ground -- officially, at least -- in terms of purchasing power. 

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* Full-time jobs lost ground when retreating by 444,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work – dropped by 188,000; non-economic reasons: +249,000. Those holding multiple jobs fell by 128,000. 

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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld decreased in August, by $1.3 billion (-0.7% MoM; +0.4% YoY), to $191.2 billion; it is difficult to conclude anything meaningful from the data beyond observing that the YoY rise occurred despite lower withholding rates from the Tax Cuts and Jobs Act of 2017. To reduce some of the volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending August was 1.9% below the year-earlier average -- well off the peak of +13.8% set back in September 2013.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.